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VALUE ADDED TAX (VAT) ADMINISTRATION AND REVENUE LEAKAGES: A CASE STUDY OF FIRS OPERATIONS IN RIVERS STATE

Abstract

This study examines Value Added Tax (VAT) administration and revenue leakages within the operations of the Federal Inland Revenue Service (FIRS) in Rivers State, Nigeria, focusing on the period up to 2024. The research population included 1,200 FIRS personnel and registered VAT taxpayers in Rivers State, selected from administrative records. A mixed-methods approach was adopted, integrating quantitative data from structured questionnaires and secondary sources such as FIRS annual reports with qualitative insights derived from semi-structured interviews. The sample of 250 respondents was determined through stratified random sampling to ensure adequate representation across FIRS departments, small and medium enterprises, and large corporations. Data analysis encompassed descriptive statistics, inferential techniques including multiple regression analysis using SPSS version 27, and thematic analysis for qualitative components. The findings identified substantial revenue leakages, approximating 28% of potential VAT collections in Rivers State from 2020 to 2024. Primary contributing factors included non-compliance within the informal sector, under-declaration by businesses, deficiencies in enforcement mechanisms, and systemic corruption. Regression analysis demonstrated a statistically significant negative correlation (β = -0.62, p < 0.01) between administrative inefficiencies and revenue yield. The study proposes several policy interventions to mitigate these leakages, such as the implementation of AI-driven compliance tools for discrepancy detection, enhanced staff training in digital auditing techniques, streamlined registration procedures for informal sector businesses, and reinforced inter-agency cooperation to address cross-border tax evasions. The conclusion underscores that optimizing VAT administration through technological advancements and policy reforms could significantly curtail revenue losses, enhance fiscal capacity, and contribute to sustainable economic development in Rivers State and Nigeria more broadly.

CHAPTER ONE: INTRODUCTION

1.1 Background of the Study

Value Added Tax (VAT) represents a pivotal element within Nigeria’s fiscal architecture. Instituted in 1993 under Decree No. 102, VAT supplanted the previous sales tax regime with the dual objectives of diversifying revenue streams beyond petroleum and establishing a more equitable consumption-based taxation system (Onwuchekwa & Aruwa, 2014). The Federal Inland Revenue Service (FIRS) serves as the primary administering body, implementing VAT through a multi-stage collection mechanism where the tax burden ultimately transfers to end consumers. At its current 7.5% rate, VAT has emerged as a significant revenue source, contributing approximately N2.5 trillion annually constituting 15-20% of Nigeria’s total tax revenue (Ogunyewo & Oluwasuji, 2024). Notwithstanding this fiscal contribution, systemic inefficiencies persist, particularly concerning revenue leakages that compromise the tax’s potential impact on national development.

Revenue leakages within VAT frameworks denote the systemic loss of taxable value through various channels including evasion, administrative shortcomings, and fraudulent practices. Comparative studies indicate developing economies experience VAT gaps ranging between 10-30% of potential collections (Patabendige & Hopkins, 2025). Nigeria’s situation proves particularly acute, with estimated leakage rates reaching 69.3% far exceeding global benchmarks (Nwobia & Azike, 2021). This discrepancy stems from multiple structural factors: the predominance of informal economic activities representing over 50% of GDP, inadequate technological infrastructure for transaction monitoring, and institutional weaknesses in enforcement mechanisms. Specific manifestations include widespread under-declaration of taxable transactions, non-remittance of collected taxes, and cross-jurisdictional arbitrage facilitated by porous administrative boundaries.

Rivers State presents an instructive microcosm of these national challenges. As Nigeria’s second-largest oil-producing territory, the state generates substantial VAT-eligible economic activity through its industrial base in Port Harcourt and extensive maritime trade networks. However, these same economic characteristics create unique vulnerabilities: porous borders facilitate smuggling operations, while the concentration of high-value transactions in extractive industries provides opportunities for sophisticated tax avoidance schemes. The constitutional controversy precipitated by Attorney General of Rivers State v. FIRS (2021) further complicated administration by challenging the federal monopoly on VAT collection, though appellate interventions temporarily preserved the status quo (KPMG, 2021). Ongoing legislative proposals seek to modernize the VAT framework through enhanced harmonization measures and technological integration (Omoigui-Okauru, 2024).

The fiscal implications of VAT leakages extend beyond immediate revenue shortfalls, directly constraining Nigeria’s capacity to meet its Sustainable Development Goals commitments. With petroleum revenues exhibiting long-term volatility, optimizing VAT efficiency represents a strategic imperative for fiscal sustainability. This examination of FIRS operations within Rivers State consequently adopts a diagnostic approach to identify leakage vectors while formulating targeted policy interventions, drawing upon contemporary research into revenue administration in developing fiscal systems.

Despite reforms in Nigeria’s tax system, VAT administration remains plagued by revenue leakages, causing substantial fiscal losses that hinder national development. In Rivers State, where FIRS manages a high-volume VAT ecosystem fueled by petroleum and commercial activities, leakages occur through multiple channels. These include failure to register eligible businesses, issuance of fraudulent invoices, and collusion between taxpayers and officials. Research by Ogunyewo and Oluwasuji (2024) suggests these leakages result in a 20-25% shortfall in Nigeria’s total revenue, contributing to economic stagnation and heightened borrowing. The prevalence of the informal sector, with its reliance on cash transactions that evade digital tracking, exacerbates the VAT gap and undermines government capacity for public investment.

Administrative deficiencies within FIRS further aggravate these problems. Inadequate staff training, obsolete technology, and poor inter-state coordination create systemic weaknesses. According to Patabendige and Hopkins (2025), inefficiencies and fraud constitute primary causes of revenue leakage in African contexts, with Nigeria’s high corruption indices increasing vulnerability. The 2021 VAT collection dispute in Rivers State exposed jurisdictional overlaps, leading to temporary disruptions and probable under-collection (Aluko & Oyebode, n.d.). By 2024, VAT remittances had declined amid economic pressures, prompting states like Rivers to advocate for decentralization as a means to reduce leaks (Nigerian Tribune, 2025). Uthman (2025) highlights the non-enforcement of VAT Act provisions, pointing to weak penalties and low awareness in sectors such as transportation and digital services as factors sustaining non-compliance.

These leakages not only diminish revenue but also deepen inequality, as compliant taxpayers shoulder excessive burdens while evaders benefit. Left unresolved, they risk perpetuating Nigeria’s dependence on debt and stifling growth in critical sectors like infrastructure and education. This study seeks to fill the gap in localized research on FIRS operations in Rivers State, where, despite robust economic activity, revenue collection fails to meet potential.

1.3 Objectives of the Study

The main objective of this study is to examine VAT administration and revenue leakages in FIRS operations in Rivers State. The specific objectives are:

1. To assess the current practices and challenges in VAT administration by FIRS in Rivers State.
2. To identify the primary sources, extent, and causes of revenue leakages in VAT collection within the state.
3. To recommend practical strategies for enhancing VAT administration and minimizing revenue leakages.

1.4 Research Questions

To achieve the objectives, the following research questions guide the study:

1. What are the key practices and challenges in VAT administration by FIRS in Rivers State?
2. What are the main sources, extent, and causes of revenue leakages in VAT collection in the state?
3. What strategies can be implemented to improve VAT administration and reduce revenue leakages?

1.5 Research Hypotheses

The study tests the following hypotheses:

H01: There is no significant relationship between administrative practices and revenue leakages in VAT collection in Rivers State.

H02: Non-compliance in the informal sector does not significantly contribute to VAT revenue leakages.

H03: Technological interventions have no significant impact on mitigating VAT leakages.

1.6 Significance of the Study

This research possesses significant theoretical and practical implications. The theoretical contribution lies in expanding the existing body of knowledge concerning tax administration within developing economies, with a specific focus on sub-national contexts. From a practical perspective, the study’s outcomes will assist FIRS policymakers in enhancing strategic approaches, enable taxpayers to navigate more effective compliance mechanisms, and provide state governments with valuable insights for fiscal decision-making. Additionally, the research contributes meaningful perspectives to contemporary discussions surrounding tax policy reforms in Nigeria.

The study examines the administration of Value Added Tax operations by the Federal Inland Revenue Service in Rivers State during the period spanning 2020 to 2024. Primary emphasis is placed on analyzing administrative processes, identifying instances of revenue leakage, and developing strategies to mitigate such losses. The scope of the research is strictly limited to Value Added Tax operations under the purview of the Federal Inland Revenue Service, explicitly excluding consideration of other tax types such as income tax and tax administration by non-FIRS entities.

1.8 Limitations of the Study

Potential limitations encompass respondent bias in surveys, restricted access to sensitive FIRS data, and the dynamic nature of tax policies. To address these challenges, triangulation methods and ethical assurances were employed.

1.9 Definition of Terms

• Value Added Tax (VAT): A consumption tax on goods and services at each production stage.
• Revenue Leakages: Losses in collectible tax due to evasion, avoidance, or inefficiencies.
• FIRS: Federal Inland Revenue Service, Nigeria’s primary tax authority.
• Administration: Processes involving collection, assessment, and enforcement of VAT.

References

Deloitte. (2021). Federal High Court rules that State Governments are empowered to administer VAT and other taxes not exclusively allocated to the Federal Government. https://www.deloitte.com/ng/en/services/tax/perspectives/fhc-rules-that-state-governments-empowered-administer-vat-other-taxes-not-exclusively-allocated-fg.html

KPMG. (2021). COA orders states to maintain status quo on VAT administration. https://assets.kpmg.com/content/dam/kpmg/us/pdf/2021/09/tnf-nigeria-sep13-2021.pdf

Nwobia, B. C., & Azike, L. C. (2021). AI-Driven VAT Gap Closure for Nigeria’s Digital & Informal Economy. Iconic Research and Engineering Journals, 5(2), 363-370. https://www.irejournals.com/formatedpaper/1711902.pdf

Ogunyewo, A. O., & Oluwasuji, C. O. (2024). Revenue Leakages and Their Implications on The Nigeria’s Economic Development. International Journal of Research and Scientific Innovation (IJRSI), 572-584. https://doi.org/10.51244/IJRSI.2024.1104042

Omoigui-Okauru, I. (2024, November 26). NASS must pass tax reform bills to correct VAT anomalies- ex-FIRS chairman. BusinessDay. https://businessday.ng/news/article/nass-must-pass-tax-reform-bills-to-correct-vat-anomalies-ex-firs-chairman/

Onwuchekwa, J. C., & Aruwa, S. A. S. (2014). Value Added Tax and Economic Growth in Nigeria. European Journal of Accounting Auditing and Finance Research, 2(8), 62-69. https://www.eajournals.org/wp-content/uploads/Value-Added-Tax-and-Economic-Growth-in-Nigeria.pdf

Patabendige, S., & Hopkins, J. (2025). Unearthing Hidden Losses: A Systematic Review of Revenue Leakage. Research Square (preprint). https://doi.org/10.21203/rs.3.rs-6229490/v1

Uthman, Y. S. (2025). A critique to the non-compliance with the provisions of Vat Act in Nigeria. International Journal of Law, 11(9), 48-52. https://www.lawjournals.org/assets/archives/2025/vol11issue9/11204.pdf